FCW Forum | Bailout

Asking the defense industry to give back

The defense industry could contribute to easing the nation's deficit with mild price reductions

With the prospects of several years of trillion-dollar deficits, finding ways to staunch the red ink by saving money on existing government programs is imperative. President Barack Obama should call on the defense industry to make voluntary price reductions on existing contracts for weapons systems, spares and outsourced maintenance during the next two years. According to recent press reports, defense spending is a priority for savings.

Last year, the Defense Department spent $94 billion buying weapons and another $41 billion on sustainment, according to department sources. Sustainment includes fuel purchases and purchases of spare parts, which are not tracked separately, and outsourced maintenance services. I would suggest that the president call on the defense industry to reduce prices by 1 percent for weapons systems and 10 percent for spare parts and maintenance. The difference reflects differences in profit margins across these kinds of contracts.

Were the defense industry as a whole to accept the offer as suggested here — and assuming $30 billion of the sustainment money is for spares and maintenance — the savings to the government would be almost $4 billion a year for each of the next two years. This would, obviously, hardly solve the deficit, but it’s not pennies either. And the savings would occur without any sacrifice in programs or mission. More broadly, the fight to save money in the context of this gargantuan deficit more resembles house-to-house combat than shock-and-awe strikes. It has many battles, none of which will be decisive by itself.

For decades, government has been a good customer for the defense industry. And, thanks to government orders, this industry has suffered less pain than almost any other industry in the country. In the country’s time of need, it is appropriate that the defense industry pay back something to the government that has allowed it to prosper.

Since the idea here is for price reductions on existing contracts, the government can’t force the defense industry to take these steps. Consistent with President Obama’s emphasis on transparency, I would urge that the names of companies that accepted and rejected the government’s request be publicized on the Internet for the public to see. Additionally, contractors who participate in this effort should receive past-performance credit for their performance on contracts where they made voluntary price reductions.

This is an unusual proposal, a bit out of the box, to use the cliché. But I think we are going to need to think outside of the clichéd box to come up with various ways to achieve cost savings and efficiencies. Although clearly the big numbers involve changes in entitlement programs, the past dismal record of presidential efforts to eliminate programs, typically rejected by Congress, suggests that we need to be looking creatively for new places to save money. As was done during the Clinton administration, we should be going to career civil servants for suggestions and encourage them to be creative.

The defense industry, more than most, is populated by patriots, including many former military officers for whom service to and sacrifice for country is deeply ingrained. The industry should demonstrate its patriotism now.

About the Author

Kelman is professor of public management at Harvard University’s Kennedy School of Government and former administrator of the Office of Federal Procurement Policy. Connect with him on Twitter: @kelmansteve

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Reader comments

Fri, Mar 20, 2009

Was Dr. Kelman drinking when he wrote this article? This is a preposterous idea! Defense companies are private companies that must make a profit to hire employees and attract investors. The government controls profits on thier contracts through competition and price analysis. Enough is enough.

Wed, Mar 18, 2009

Obama’s emphasis on transparency in the government has been very weak to say the least.
This proposal is way-way to far out of the box for me.

Wed, Mar 18, 2009 m

Yikes! This is an astonishly naive proposal. First of all, defense contractors have already competed their rates. Secondly, they are publicly held companies accountable to shareholders who count individual taxpayers and emplyees unions among their ranks. This "recycling" of income just doesn't make sense. Moreover, this defense sector understands clearly that the sentiment of those in the White House and in control of Congress is that they defense contractors must be punished as harshly and as soon as possible. Why would they pitch in now? Maybe if the White House and Congress could actually give some guarantees that the savings would be exploited rationally?

Wed, Mar 11, 2009 Joe Washington, DC

I think you can all agree that the Defense Contractors play a critical role and defending our nation and should be paid fairly and reasonable for their services. However, they also have an obligation to not overcharge for their services on prime contracts. Case in point: Lockheed Martin to pay 38 million dollars for overbilling Air Force http://www.spacewar.com/2003/030827213051.yuysn61a.html Yet years later: Lockheed Martin Overbilled JSF Program Office $265 Million, Company Says http://www.accessmylibrary.com/coms2/summary_0286-32600498_ITM I am not picking on LM, whom I believe has provided our country with some of the best technology in the workd to defend our great nation. Further research into GAO archives and DOJ findings will reveal numerous instances of A&D and SI companies overcharging the federal government on contracts. There is a simply solution it seems to stop this kind of behavior in its tracks and recoup billions in the process. Make it a felony, especially in times of war, to knowingly or though negligence, such as egregious internal billing errors, to overcharge the government. Merely having companies with billion-dollar contracts pay million dollar fines is clearly not effective in preventing this recurring problem.

Tue, Mar 10, 2009

I can see Dr. Kelman is online with the Obama plan, redistribution of wealth. All of those big savings from this plan can then be readily applied to more welfare checks and other non-contributing members of society. Dr. Kelman should try living in some remote outpost in Afghanistan for one year and then come back and talk about sacrificing for the "greater good".

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